Price Floor Econ Graph

The graph below illustrates how price floors work.

Price floor econ graph.

In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium. They can set a simple price floor use a price support or set production quotas. This is even more inefficient and costly for the government and society as a whole than the government directly subsidizing the affected firms. Drawing a price floor is simple.

When a price floor is put in place the price of a good will likely be set above equilibrium. The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market. Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity. Price supports sets a minimum price just like as before but here the government buys up any excess supply.

This graph shows a price floor at 3 00. Price floors can also be set below equilibrium as a preventative measure in case prices are expected to decrease dramatically. Prateek agarwal s passion for economics began during his undergrad. A few crazy things start to happen when a price floor is set.

Simply draw a straight horizontal line at the price floor level. You ll notice that the price floor is above the equilibrium price which is 2 00 in this example.